"Hedge Funds: The New Dumb Money "

Much of the fury in Wednesday’s nearly 500 point “melt up” in the
Dow was generated by hedge funds panicking to cover shorts. Convinced of
the imminent collapse of Europe, the impotence of governments, and the
death spiral in sovereign bonds, many managers were running a maximum
short position at the Monday opening, and for the umpteenth time, were
forced to cover at a loss. Meet the new dumb money: hedge funds.

When
I first started on Wall Street in the seventies, you heard a lot about
the “dumb money.” This was a referral to the low end retail investors
who bought the research, hook-line-and-sinker, loyally subscribed to
every IPO, religiously bought every top, and sold every bottom.

Needless
to say, such clients didn’t survive very long, and retail stock
brokerage evolved into a volume business, endlessly seeking to replace
outgoing suckers with new ones. When one asked “Where are the customers’
yachts”, everyone in the industry knew the grim answer.

Since
the popping of the dot-com boom in 2000, the individual investor has
finally started to smarten up. They bailed en masse from equities,
seeking to plow their fortunes into real estate, which everyone knew
never went down. Since 2008, the exit from equities has accelerated.
There have been over $400 billion in redemptions of equity mutual funds,
compared to $800 billion in purchases of bond funds.

Although I
don’t have the hard data to back it, I bet the average individual
investor is outperforming the average hedge fund in 2011. With such
heavy weightings of bonds and cash, how could it be otherwise. While the
current yields are miniscule, the capital gains have to be humongous
this year, with yields plunging from 4% to 2%.

This takes me back
to the Golden Age of hedge funds during the 1980’s. For a start, you
could count the number of active funds on your fingers and toes, and we
all knew each other. The usual suspects included the owl like Soros, the
bombastic Robertson, steely cool Tudor-Jones, the nefarious Bacon, the
complicated Steinhart, of course, myself, and a handful of others....MORE

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